May 19, 2023
How to invest globally without taking on a world of risk: Dale Jackson
By Dale Jackson
Target Global Co-Founder on AI Opportunities
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Even within that small sliver of publicly traded equities, roughly two-thirds of Canadian-listed stocks are tied to the resource and finance industries.
That concentrated risk is why it’s important for Canadian investors to diversify beyond our border but staking a claim in the world can be complicated, risky and expensive for the average investor.
It’s always the right time for an investment portfolio to be geographically diversified but with emerging markets, China and Europe still struggling with the economic backlash from the pandemic there’s no time like the present.
Here are some tips and options for opening up your portfolio to a world of opportunity.
LAYING THE GROUNDWORK
Thanks to advances in technology, the cost of investing on a global scale is relatively cheap for big institutional investors with their own research departments, foreign exchange desks and trading networks.
There are low-cost ways for retail investors to get access to foreign equities but the cost of dealing in foreign currencies is a hidden risk many don’t consider.
Most foreign equity funds sold in Canada have a version that hedges the Canadian dollar at a cost much higher than the U.S. dollar version.
To avoid having to pay currency traders for an ongoing labyrinth of foreign transactions it’s best to buy foreign equities in U.S. dollars, which is the global standard currency. That means banking up U.S. dollars in trading accounts such as a registered retirement savings plan (RRSP) and tax-free savings account (TFSA).
It’s important to know that it takes time to properly diversify and that includes determining how much and when your portfolio should be allocated to U.S. dollars. The loonie is currently trading mid-range to the U.S. dollar and you can always convert them back when you need the cash.
GLOBAL MUTUAL FUNDS
Most Canadian mutual fund providers offer a wide variety of global funds including broad global funds (all countries), international funds (all countries minus Canada and the U.S.), or funds that concentrate on specific countries, regions, or global sectors like technology.
Many foreign equity funds are actively managed by investment teams with vast research capabilities and experience in the focus area. Some funds are sub-managed by firms located in the specific geographic region.
Annual fees for that sort of reach and expertise can be two per cent to three per cent of the total amount invested, which is ultimately drawn from the total return.
GLOBAL EXCHANGE TRADED FUNDS (ETFS)
ETFs generally have the same reach as mutual funds in terms of geographic regions and global sectors. The big difference is; they are passively managed. That means holdings are bought and sold according to a preset formula such as market weighting in the underlying index.
ETFs are not as effective as actively managed mutual funds at adjusting to changes or nuances relating to specific foreign markets.
On the plus side, fees on unhedged foreign ETFs are usually much lower than mutual funds; often below 0.05 per cent on the amount invested annually.
Market weighted ETFs that track an index are also more transparent. Holdings and changes mimic the underlying index while mutual fund managers are only required to provide scant information on what and how much the fund holds.
U.S. LISTED STOCKS
Stocks trading on overseas markets can be difficult for the average investor to access directly but most Canadian trading accounts offer full access to major U.S. exchanges.
U.S. equities are also global equities because roughly 50 per cent of all publicly traded companies in the world are based in the United States. Many generate revenue and grow earnings around the world. That not only gives investors in U.S. stocks a global reach, but it also puts the onus on the company to hedge all other foreign currencies.
